• 3 minutes Nucelar Deal Is Dead? Iran Distances Itself Further From ND, Alarming Russia And France
  • 5 minutes Don Jr. Tweets name Ukraine Whistleblower, Eric Ciaramella. Worked for CIA during Obama Administration, Hold over to Trump National Security Counsel under Gen McCallister, more . . . .
  • 9 minutes Shale pioneer Chesepeak will file bankruptcy soon. FINALLY ! The consolidation begins
  • 12 minutes China's Blueprint For Global Power
  • 3 hours EU has already lost the Trump vs. EU Trade War
  • 2 days Science: Only correct if it fits the popular narrative
  • 1 min Impeachment S**te
  • 2 days Crazy Stories From Round The World
  • 5 hours Pope Proposes New Sin: Thou Shalt Not Destroy The Harmony Of The Environment
  • 10 hours Everything You Need To Know About Trump
  • 2 hours 55.00 WTI
  • 2 hours Visualizing Pennsylvania Oil & Gas Production (Through September 2019)
  • 1 day IEA predicts oil demand will grow annually at 1 million barrels a day for the next 5 years
  • 4 hours Water, Trump, and Israel’s National Security
  • 2 days Atty General Barr likely subpeona so called whistleblower and "leaker" Eric Ciaramella
  • 2 days Iran Burning: Shock Gas Price Hike Triggers Violent Protests After Subsidy Cuts
  • 1 day ‘If it saves a life’: Power cut to 1.5 million Californians
  • 10 hours Last I Checked
Alt Text

The Worst Oil Trades Ever Made

Wall Street is full of…

Alt Text

What The Market Is Overlooking In The Occidental Deal

Occidental Petroleum has caught a…

Ivan Kitov

Ivan Kitov

I am a Doctor of Physics and Mathematics, lead researcher at the Institute for the Geospheres’ Dynamics, Russian Academy of Sciences. Academic specialization: geophysics, seismology,…

More Info

Premium Content

The Unbreakable Bond between Crude and Steel

The price of iron and steel is likely to fall in October-December 2012 following the drop in oil price.  We have been reporting on the trade-off between the (not seasonally adjusted) producer price index of crude oil (domestic production) and the PPI of iron and steel since 2009. It has been always a linear and lagged link between them.  Here we present data through September 2012.

We first reported that the PPI of crude oil had been likely evolving in sync with that of iron and steel, but with a lag of two months in September 2009.  In order to present both indices in a comparable form, the difference between a given index, iPPI (i.e. iron and steel or crude), and the overall PPI was normalized to the PPI: (iPPI(t)-PPI(t))/PPI(t). These normalized differences represent the evolution of the rate of deviation from the PPI over years. 

Figure 1 depicts the corresponding time histories of the normalized deviations from the PPI, including the most recent period through September 2012.  Even a simple visual inspection reveals the following feature: the (normalized deviation from the PPI of the) index of iron and steel lags by approximately two months behind the (normalized) index of crude oil.

deviation of the iron and steel price index and the index of crude oil
Figure 1. The deviation of the iron and steel price index and the index of crude oil from the PPI, normalized to the PPI.

In order to reduce both deviations to the same scale we additionally normalized the curves in Figure 1 to their peak values between 2005 and 2012.

(iPPI(t)-PPI(t))/[PPI(t)*max{iPPI-PPI)}]

This scaling allows a direct shape comparison. In Figure 2, we display the normalized index of iron and steel shifted by two months ahead to synchronize its peak with that observed in the normalized index for crude petroleum. The scaled index of crude demonstrates short-term deviations from the index of iron and steel in the overall shape and timing of the peak and trough. Simple smoothing with a three-month moving average, MA(3), makes the curves resemblance even better. As an extra benefit of the resemblance, one can use the two-month lag to predict the future of the iron and steel price index.

Deviation of the iron and steel price index from the PPI

the PPI and the peak value after 2005
Figure 2. Deviation of the iron and steel price index from the PPI, normalized to the PPI and the peak value after 2005 as compared to the deviations of the index for crude petroleum normalized in the same way. The normalized index for iron and steel is shifted two months ahead. One can expect the index of iron and steel to fall relative to the PPI in October-December 2012. 

Conclusion

The link between oil and iron has been unbreakable. Between 2006 and 2012, the deviation of the price index of iron and steel from the PPI in the USA repeats the trajectory of the deviation of the index of crude petroleum (domestic production) with a two-month lag. Therefore, the prediction of iron and steel price for at this horizon is a straightforward one. From Figure 2, one can expect the price of iron and steel to fall relative to the PPI in October-December 2012 in line with the observed fall in oil price.

By. Ivan Kitov




Download The Free Oilprice App Today

Back to homepage



Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play